Thursday, May 1, 2008

Technical Thursdays: May’s Market Flowers Will Wilt Before Blooming This Summer

There’s a certain feebleness to the current US equity rally that the accompanying chart* shows quite clearly and should be a cause for concern to the bulls.

To begin, it is always more encouraging when Momentum (first indicator) is more robust. Failing to reach even the 100 mark is not inspiring. Moving in sync is MACD (second indicator). The slope of the MACD lines has diminished since mid April. And now the prospects of a crossover of the short-term (blue line) down through the longer-term (maroon) is a danger signal. Last, we have the slow stochastics where the short-term (red) has crossed the longer-term (blue) and appears headed toward oversold territory (under 20).

Investment Strategy Implications

From a technical perspective, the above points along with the chart pattern stuff (resistance levels at and above 1400 (S&P 500) as well as the concern that a failure to breech its 200-day moving average) suggest investors will likely be hard pressed to reasons to be overly bullish. Moreover, recent bullish sentiment readings (Barrons cover story, AAII survey) is a serious cause for concern.

From a fundamental perspective, while there has been some improvement equities have reached fair value (see table below)*, 1Q08 earnings and real economy data are being digested, and the Fed is likely on rate cut pause, the catalyst for a higher market does not exist.

Lastly, from a US domestic political perspective, despite the beating Obama (the nominee) and Clinton (the spoiler) have exacted on each other and themselves, McCain has yet to make substantial enough headway to alleviate concerns of his failing to win this fall.

The net result of all of the above appears to be a weak spell for most equity markets (except Brazil – see yesterday’s blog posting).

*click images to enlarge

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